[Federal Register Volume 65, Number 86 (Wednesday, May 3, 2000)]
[Proposed Rules]
[Pages 25676-25692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10909]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 900, 940, 950, 955 and 956
[No. 2000-20]
RIN 3069-AA98
Federal Home Loan Bank Acquired Member Assets, Core Mission
Activities, Investments and Advances
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to add a new part 955 to its regulations to authorize the Federal Home
Loan Banks (Banks) to hold acquired member assets (AMA) and to amend
its recently adopted part 940 to enumerate the types of core mission
assets (CMA) that must be addressed in the Banks' strategic business
plans. The Finance Board is also proposing related changes to its
regulations governing the Banks' investment and advances authorities.
DATES: Comments on this proposed rule must be received in writing on or
before June 2, 2000.
ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to
the Board, by electronic mail at [email protected], or by regular mail at
the Federal Housing Finance Board, 1777 F Street, N.W., Washington,
D.C. 20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director and Chief
Economist, (202) 408-2821; Scott L. Smith, Deputy Director, (202) 408-
2991; Ellen E. Hancock, Senior Financial Analyst, (202) 408-2906;
Christina K. Muradian, Senior Financial Analyst, (202) 408-2584, Office
of Policy, Research and Analysis; or Eric M. Raudenbush, Senior
Attorney-Advisor, (202) 408-2932; Office of General Counsel, Federal
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Background
A. General
On November 12, 1999, the President signed into law the Federal
Home Loan Bank System Modernization Act of 1999 (Modernization Act),
see Title VI of the Gramm-Leach-Bliley Act, Public Law 106-102 (1999),
which amended the Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421
through 1449, among other things, to establish a new capital structure
for the Banks, to authorize the Banks to accept additional types of
collateral as security for advances, and to devolve to the Banks from
the Finance Board full authority over their corporate governance, all
subject to the rules and regulations of the Finance Board. In order to
implement these and other statutory changes, the Finance Board has
already adopted: a final rule devolving certain corporate governance
authorities to the Banks, see 65 FR 13663 (March 14, 2000); an interim
final rule conforming certain membership and advances requirements to
the requirements of the Modernization Act, see 65 FR 13866 (March 15,
2000); a final rule setting forth a corporate governance framework for
the Banks, which was published in the Federal Register on May 1, 2000;
a final rule reorganizing the Finance Board's regulations to better
accommodate the substantive regulatory changes, see 65 FR 8253 (Feb.
18, 2000); and a proposed rule that would amend the Finance Board's
advances collateral regulation and make other related changes to the
regulations. In addition, the Finance Board intends to adopt a proposed
rule on risk management and capital during the second quarter of 2000.
By statute, the Finance Board is required to publish a final rule on
capital by November of 2000.
Under the revised Bank Act and the new regulations, each Bank will
have authority to engage in a wider range of asset activities than in
the past, will have more discretion in establishing its capital
structure, and will have more freedom to operate its business without
the day-to-day involvement of the Finance Board. As the agency charged
by Congress with the duty to ensure that the Banks carry out their
statutory mission, see 12 U.S.C. 1422a(a), the Finance Board believes
that it is especially important to keep the Banks focused on their
mission as they exercise their expanded statutory and regulatory
authorities. To this end, the Finance Board's recently-adopted final
governance rule requires that each Bank's board of directors have in
place at all times a strategic business plan that describes how the
Bank's business activities will achieve the mission of the Bank (to be
codified at 12 CFR 917.5). In order to clarify this requirement, the
Finance Board established in its regulations a new part 940, which, in
Sec. 940.2 defines the ``mission of the Banks'' as providing to members
and associates financial products and services, including but not
limited to advances, that assist and enhance such members' and
associates financing of: (a) Housing, including single-family and
multifamily housing serving consumers at all income levels; and (b)
community lending. This definition of the mission of the Banks and the
regulatory provisions that implement it are intended to ensure maximum
use of the cooperative structure of the Bank System to provide funds
for housing finance and community lending.
In order to further clarify the strategic business planning
requirement, this proposed rule would enumerate in regulation those
specific Bank activities that the Finance Board considers to be ``core
mission activities'' (CMA); that is, those activities that are within
the
[[Page 25677]]
authority of the Banks to undertake that are most central to the
achievement of the Banks' mission.
The addition of a CMA provision at this time will also help each
Bank in developing and implementing its new capital structure plan,
which, under the Modernization Act, must be submitted to the Finance
Board for approval within 270 days after the promulgation of the
Finance Board's final capital regulation. As required in the
Modernization Act, the forthcoming capital rule will implement a risk-
based capital requirement and new leverage requirements that will be
supported by new classes of stock, one of which will be considered
permanent capital. To accomplish the transition to the new capital
structure, the Modernization Act also requires each Bank to develop and
submit for Finance Board approval its capital structure plan. The
design of each Bank's plan, as well as the Bank's ability to sell
equity to its members under its new capital structure, will depend on
its projections of Bank business activities and income, which should
conform to the Bank's strategic business plan. Because a Bank will need
to address mission activities in its strategic business plan, the CMA
definition will also be an important consideration in the drafting of
the capital structure plan. Therefore, the Finance Board has determined
that it is necessary for CMA to be defined prior to the Banks' drafting
of their strategic business plans.
In addition, the proposed rule would codify in regulation the
Banks' authority to hold acquired member assets (AMA)--that is, whole
loans eligible as collateral for Bank advances that may be acquired
from Bank members or associates. This authority would be an expansion
and refinement of the Banks' existing authority (granted by resolution
of the Finance Board) to establish programs under which they acquire
mortgage assets from members, while sharing with the member the credit
risk associated with the loans. Because AMA would constitute a core
mission activity, it is logical for the Finance Board to set forth in
regulation the parameters for such acquisitions at this time.
Finally, the proposed rule would codify new regulations regarding
the investment and advances authorities of the Banks so that the Banks
will have full regulatory authority to engage in CMA.
B. Bank Investment Practices as Related to the Definition of CMA
Consolidated obligations (COs) issued under section 11 of the Bank
Act, 12 U.S.C. 1431, are the primary source of funding for the Banks.
COs are debt instruments issued in the global capital markets for which
the twelve Banks are jointly and severally liable. Because of the
Banks' status as government-sponsored enterprises (GSEs), the costs to
the Banks of obtaining such funding are substantially less than the
borrowing costs to other entities for issuing comparable debt. The
Banks pass the benefit of this funding advantage to their members,
primarily through wholesale loans (called advances) priced lower than
the members could otherwise obtain to provide support for housing
finance and community lending, in fulfillment of the Banks' mission.
Prior to enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), Public Law 101-73, 103 Stat. 413
(1989), which amended the Bank Act in response to the savings and loan
crisis of the 1980s, the Banks used all of their COs to fund advances,
thus directly using their GSE funding advantage to meet their mission
of enhancing the availability of housing finance.
In large part due to the financial burdens imposed on the Banks as
a result of the savings and loan crisis and the enactment of FIRREA,
the Banks began in 1991 to use a portion of the proceeds from COs to
finance investments--primarily money market investments and mortgage
backed securities (MBS)--bearing little or no relation to the Banks'
public purpose. Of these investments, MBS have been appreciably more
profitable per dollar invested than money market investments.
The Finance Board initially limited MBS investment by the Banks in
part because of concern about the Banks' ability to manage the interest
rate and options risk associated with these assets. However, now that
the Banks have developed more effective techniques for hedging these
risks, and there are policy limits in place constraining the Banks'
interest rate risk exposure, the MBS limit can be viewed less as a
safety and soundness constraint and more as a means to restrain a non-
mission-related activity. MBS generally are traded in large, well-
established and liquid markets. As such, it is the view of the Finance
Board that the Banks' presence in these markets does not result in
increased availability of funds for housing, or in a lower cost of
funds. Moreover, and perhaps most importantly for the Finance Board,
the Banks' MBS investments generally do not involve the Banks working
with or through Bank System members and thus do not contribute to the
cooperative nature of the Bank System as do advances and certain other
financial products and services offered by the Banks. Thus, although
MBS are housing-related, the extent to which these investments support
the Banks' housing finance mission is debatable.
The increase in investments not directly related to the Banks'
public purpose was a rational response to the sharp fall-off in Bank
System advances and net income that occurred as a result of the savings
and loan crisis. As a percentage of total assets, the level of such
non-mission-related investments rose substantially in the early 1990s,
but has begun to decline appreciably in recent years as the membership
base of the Bank System and the level of advances outstanding to
members have increased. Investments represented 29 percent of Bank
System assets at the end of 1999 compared with 50 percent at year-end
1995.
Bank System earnings and advances are now at record levels.
Outstanding advances, surpassing the previous all time high of $167
billion in the second quarter of 1997, reached $396 billion at year end
1999. Net income has steadily increased to $2.1 billion in 1999 after
dropping to a recent low of $850 million in 1992. In addition, although
the Banks initially increased investments as a substitute for declining
advances, Bank investments generally have increased since 1992 along
with advances. Investments increased over 100 percent, from $79 billion
to $171 billion, between 1992 and 1999. To some extent, the Finance
Board has viewed this growth as a means to compensate for a trend
toward lower spreads on advances due to increased funding competition
from other sources.
However, given its duty under the Bank Act to ensure that the Banks
carry out their housing finance mission, see 12 U.S.C.
1422a(a)(3)(B)(ii), the Finance Board has been concerned for some time
that the Banks have used substantial amounts of the proceeds of their
COs to finance arbitrage investments. Once the Banks' ability to
generate income had demonstrably improved, the Finance Board initiated
steps to address the Bank System-wide growth of non-mission-related
investments. A first step was to recognize that, while the detailed
list of restrictions and limits placed on the Banks' investment
authority by the Federal Home Loan Bank System Financial Management
Policy (FMP) \1\ successfully ensured the safety and soundness of the
Banks, the FMP provided little, if any, flexibility or
[[Page 25678]]
incentive for the Banks to seek out and develop new assets and
activities that are permissible under the Bank Act and that, because
they assist and enhance member lending for housing finance, are
consistent with the mission of the Bank System.
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\1\ The FMP is a non-codified policy of the Finance Board that
governs Bank investments and other financial management matters.
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To address this lack of flexibility, the Finance Board amended the
FMP in 1996 to permit the Banks, among other things, to engage in new
activities designed in part to add to their balance sheets higher
yielding, yet mission-related, assets that would also preserve and
promote the cooperative nature of the Bank System. See FMP, section
II.B.12. The first such activities were approved on a pilot program
basis in 1996 and 1997 and have been in operation since then. After
several years of experience with these pilot programs, the Finance
Board approved a more general authorization for Bank acquisition of
single-family mortgage assets, which required that these programs
involve credit risk-sharing with members in order to promote the
cooperative nature of the Bank System. See Finance Board Res. No. 99-50
(Oct. 4, 1999), and Finance Board Resolution No. 99-66 (Dec. 14, 1999).
Part 955 of the proposed rule would refine and expand these
authorities by authorizing the Banks to hold AMA. As proposed in part
955, AMA transactions would enhance the cooperative nature of the Bank
System by allocating the risk components of the transaction between the
member and the Bank according to the ability of each to manage such
risk. Specifically, members are best suited to manage credit risk,
because they are most familiar with their customers and the local
market. Accordingly, under the general risk-sharing structure set forth
in part 955 of the proposed rule, members would maintain their
traditional customer relationships, including marketing, servicing,
underwriting and managing credit risk. Because the Banks are capital
market experts and have more ready access to these markets, they would
be responsible for managing liquidity, interest rate, and options risks
under proposed part 955. It is anticipated that expansion of these AMA
activities will permit the Banks to reduce their holdings of money
market investments and MBS, while providing an adequate return on
investment of shareholder capital.
A second major step taken by the Finance Board to address concerns
about the Bank System-wide growth of non-mission-related investments
was the publication of a proposed Financial Management and Mission
Achievement (FMMA) rule. See 64 FR 52163 (Sept. 27, 1999). Among other
things, the proposed FMMA rule would have established mission-related
regulatory standards, including a definition of CMA and a CMA-to-COs
percentage requirement. The Finance Board withdrew the proposed FMMA
rule following enactment of the Modernization Act, as certain
provisions of the FMMA rule, as proposed, would no longer meet the
requirements of the Bank Act as amended.
C. Comments Received on the Proposed FMMA Rule Related to the Core
Mission Definition and Requirement
Prior to and following the withdrawal of the proposed FMMA rule,
the Finance Board received 19 comments on the provisions of the
proposal that related to mission achievement: six from Banks, four from
Bank members, four from trade associations, two from community groups,
one from a Bank Affordable Housing Advisory Council, one from a state
housing finance agency and one from a private sector individual. In
general, the comments expressed concerns about the mission provisions
of the rule. The comments from the Banks, Bank members and several
trade associations primarily focused on their opposition to two
provisions related to CMA: (1) A requirement that, following a
transition period, each Bank maintain an annual average ratio of at
least 100 percent of CMA to the book value of the Bank's total
outstanding COs; and (2) a limitation on the dollar amount of advances
to members with assets of greater than $500 million that would count as
CMA. Neither of these provisions is included in this proposed rule.
The Banks, Bank members and several trade associations also opposed
the general exclusion of MBS as a core mission activity in the proposed
FMMA rule. Several commenters argued that it is not within the province
of the Finance Board to determine that investment in MBS is not part of
the mission of the Banks. To the contrary, the Bank Act authorizes the
Finance Board to supervise the Banks and to promulgate and enforce such
regulations and orders as are necessary from time to time to carry out
the provisions of the Bank Act. See 12 U.S.C. 1422b(a)(1). Among the
provisions of the Bank Act are those outlining the duties of the
Finance Board, which include the duty to ensure that the Banks carry
out their housing finance mission. See id. Sec. 1422a(a)(3)(B)(ii).
Because Congress has not expressly defined the parameters of the
Banks' housing finance mission, it is the responsibility of the Finance
Board--as the body charged with the duty to ensure that the Banks
fulfill that mission and, more generally, as the supervisory regulator
of the Banks and the agency charged with the administration of the Bank
Act--to make this judgment reasonably considering both empirical
evidence and the provisions of the Bank Act.
As discussed above, the MBS markets are large, well-established and
liquid and the Finance Board has been presented with no evidence that
the Banks' presence in these markets generally results in increased
availability of funds for housing or reduces the cost of funds.
Additionally, these investments generally do not involve working with
or through Bank System members and, therefore, do not contribute to the
cooperative nature of the Bank System. As a result, the Finance Board
has chosen to continue to exclude MBS from the definition of core
mission activities in this proposed rule.
Several Banks, one Bank Affordable Housing Advisory Council, one
trade association and one state housing finance agency expressed
concerns about the ability of housing finance agencies to meet the
requirements necessary for housing finance agency (HFA) bonds to count
as CMA under the proposed FMMA rule. It is the judgment of the Finance
Board that HFA bonds that are acquired from a Bank System member or
associate have the characteristics of AMA. Accordingly, under this
proposed rule, HFA bonds qualify as AMA and, thus, also as CMA. The
Finance Board has attempted to address these comments regarding HFA
bonds in drafting proposed part 955 (see the discussion of part 955
below) explaining under what conditions HFA bonds meet the requirements
of AMA and therefore qualify as CMA.
Two community groups supported the targeted equity investments
included as CMA in the proposed FMMA rule and suggested that the
authority should be expanded to include a wider range of investments.
The Finance Board has expanded the targeted investments that qualify as
CMA in this proposed rule to include certain debt investments, as well
as equity investments. The private sector commenter described an
investment vehicle that he felt would assist the Banks in making
investments in small business investment companies formed pursuant to
15 U.S.C. 681(d) (SBICs) included as CMA in the proposed FMMA rule.
These comments
[[Page 25679]]
were considered by the Finance Board in drafting this proposed rule.
The Finance Board invites anyone with an interest in this proposed
rule, including all those who commented on the proposed FMMA rule, to
submit written comments to the Finance Board during the comment period.
II. Analysis of Proposed Rule
A. Core Mission Activities--Part 940
The proposed rule would define the on- and off-balance sheet items
that the Finance Board has determined qualify as CMA for the Banks. The
Finance Board would define CMA at this time in order to clarify for the
Banks the types of business activities that the Finance Board considers
to be consistent with maximizing the public benefit of the Banks' GSE
status and to aid the boards of directors of the Banks in the strategic
planning required of them under new Sec. 917.5 of the regulations.
Section 940.1 of the proposed rule would set forth definitions of
terms used in part 940. These terms are discussed below as they relate
to the substantive provisions of the proposed rule.
1. Advances as CMA--Sec. 940.3(a)(1)
Proposed Sec. 940.3 lists those Bank activities that would qualify
as CMA. Under proposed Sec. 940.3(a)(1), all Bank advances would
qualify as CMA.
2. Acquired Member Assets as CMA--Sec. 940.3(a)(2)
Under proposed Sec. 940.3(a)(2), all AMA held pursuant to proposed
part 955 (discussed in detail below) would qualify as CMA except for
United States government-insured or guaranteed whole single-family
residential mortgage loans \2\ acquired under a commitment entered into
after April 12, 2000. These loans would qualify as CMA only in a dollar
amount up to 33 percent of the total dollar amount of AMA (not
including government-insured or guaranteed whole single-family
residential mortgage loans acquired under a commitment entered into on
or before April 12, 2000) acquired by a Bank during each calendar year.
For the year 2000, this calculation would be made on a pro-rata basis,
based only on transactions occurring after April 12, 2000.
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\2\ Whole single family residential mortgage loans insured by
the United States government consist of loans insured by the Federal
Housing Administration (FHA), guaranteed by the Veterans
Administration (VA) and insured by the Rural Housing Service (RHS).
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In recognition of the fact that many Banks do, and will in the
future, hold participation interests in AMA originally acquired by
other Banks, the proposed rule would permit one or more Banks to make
the above-described calculation by aggregating both the total and
government-insured AMA on their respective balance sheets. Naturally,
under this provision, a Bank may include itself in only one such
aggregated calculation in any calendar year.
The Finance Board recognizes that both conventional and government-
insured or guaranteed residential mortgage loans are within the
parameters established for AMA. However, in order to provide incentive
for the Banks to maintain a broad focus that encompasses acquisition of
significant amounts of conventional loans, the Finance Board is
permitting Banks to count as CMA one dollar of government-insured AMA
for every two dollars of conventional loans acquired as AMA.
The distribution of the Banks' current mortgage portfolio suggests
that a high percentage of government-insured loans have been acquired
when compared to the percentage of such loans in the total mortgage
market. The proposed rule would encourage the Banks to see to it that
the composition of their mortgage portfolios more closely reflects the
distribution of loans made in the marketplace. This provision is
intended to reduce the emphasis on government-insured loans that
currently exists in the Banks' mortgage portfolio and to provide an
incentive for Bank acquisition of conventional mortgages, which was the
original intent of the Bank mortgage acquisition programs approved by
the Finance Board over the last several years.
3. Letters of Credit and Intermediary Derivative Contracts as CMA--
Secs. 940.3(a)(3) and (a)(4)
Under proposed Secs. 940.3(a)(3) and (a)(4), standby letters of
credit (SLOCs) and intermediary derivative contracts (primarily
interest rate swaps), respectively, would qualify as CMA.
4. Targeted Debt and Equity Investments as CMA--Sec. 940.3(a)(5)
Under proposed Sec. 940.3(a)(5)(i), non-securitized debt
investments and equity investments that primarily benefit low- or
moderate-income households or areas targeted for redevelopment by
local, state, tribal or Federal government (including Federal
empowerment zones and enterprise and champion communities) would be
considered to be CMA if the investment provides or supports: affordable
housing; economic development; community services; permanent jobs for
members of low- or moderate-income households; or area revitalization
or stabilization. This list of investments is drawn primarily from the
Office of the Comptroller of the Currency's regulatory definition of
public welfare investments that are permitted for national banks. See
12 CFR 24.3(a). Examples of investments that would qualify as CMA under
proposed Sec. 940.3(a)(5)(i) include, among other things, stock in
Community Development Financial Institutions (CDFIs), and secondary
capital in community development credit unions. Part 956 of the
proposed rule (discussed in detail below) would authorize the Banks to
make such targeted investments.
For purposes of proposed Sec. 940.3(a)(5)(i), a low- or moderate-
income household is defined to mean a household with an income that is
at or below 115 percent of the area median income, as published by the
Department of Housing and Urban Development (HUD). Defining low- or
moderate-income as no more than 115 percent of area median income is
consistent with the low- or moderate-income targeted beneficiaries of
other Finance Board housing and community lending programs as set forth
in the Community Investment Cash Advance (CICA) Programs regulation.
See 12 CFR 952.3.
Proposed Sec. 940.3(a)(5)(ii) would require that these targeted
non-securitized debt investments and targeted equity investments
involve one or more members or associates in a manner, financial or
otherwise, and to a degree to be determined by the Bank. For instance,
a Bank could determine at a minimum that a member's or associate's
sponsorship of a nonprofit or other community-based partner seeking an
investment constitutes sufficient involvement for purposes of this
section. Another Bank may require a greater degree of member or
associate participation, including financial participation, at the
Bank's discretion. This requirement is designed to promote the
cooperative nature of the Bank System, yet provide flexibility to the
Bank in making such targeted investments.
Because proposed Sec. 940.3(a)(5)(i) specifies that targeted
investments that count as CMA must be non-securitized debt investments,
investments in mortgage-backed and other asset-backed securities would
not count as CMA even if such securities appear to meet the other
requirements of proposed Sec. 940.3(a)(5). For example, the loans in
collateral pools for MBS securitized by loans made pursuant to the
Community Reinvestment Act (CRA MBS) provide affordable housing for
low- or moderate-
[[Page 25680]]
income households. However, the characteristics of and market for CRA
MBS are very similar to the characteristics of and market for other
MBS. As discussed above, although MBS are housing-related, the extent
to which these investments support the Banks' housing finance mission
is debatable given the large, well-established and liquid markets in
which they trade. Moreover, MBS investments generally do not involve
the Banks working with or through their members and thus do not
contribute to the cooperative nature of the Bank System. However, the
Finance Board realizes that there are some mortgage-backed or asset-
backed securities that should be granted CMA status under proposed
Sec. 940.3(a)(5)(i) based upon a determination that a Bank's purchase
of such securities would substantially contribute to opening an
underserved market that would not otherwise be reached by the private
sector. The Finance Board's goal is to characterize as CMA those
mortgage-backed and asset-backed securities that substantially
contribute to opening an underserved market that would not otherwise be
reached by the private sector, while at the same time not
characterizing as CMA those securities that are already traded in
large, well-established and liquid markets. The Finance Board invites
comment on an appropriate standard for distinguishing between mortgage-
backed or asset-backed securities that do substantially contribute to
opening underserved markets and those that do not.
The Finance Board supports the use of private capital to meet the
needs of underserved markets, communities and areas and encourages the
Banks to consider making targeted investments as described in proposed
Sec. 940.3(a)(5). It is anticipated that each Bank could accumulate $10
million to $30 million of such investments, depending on the size of
the Bank, for a Bank System-wide total of approximately $200 million in
targeted investments. Any such investment by a Bank would be subject to
the new business activity requirements of proposed part 980 (which is
included in the Finance Board's recently-adopted proposed rule on
advances collateral, and which is discussed in more detail below), and
the requirements of the risk-based capital rule to be proposed shortly
by the Finance Board. Specifically, it is anticipated that, in the
forthcoming capital rule, the Finance Board will assign the same
capital treatment under its risk-based capital requirement for targeted
investments that is assigned to public welfare investments for national
banks. However, should the Banks acquire more than $200 million of such
targeted investments, or should any one Bank acquire more than the $10
million to $30 million of such targeted investments, the Finance Board
might consider imposing a higher capital charge for additional amounts.
Since the proposed targeted investment authority is new, the
Finance Board specifically requests comment on any impediments the
Banks may face in making targeted investments and how the Finance Board
might assist in reducing such impediments.
5. Stock in SBICs as CMA--Sec. 940.3(a)(6)
Under proposed Sec. 940.3(a)(6), investments in SBICs formed
pursuant to 15 U.S.C. 681(d) would qualify as CMA to the extent that
the investment is structured to be matched by an investment in the same
SBIC by a member or associate of the Bank making the investment in the
SBIC. Investment in such SBICs is explicitly authorized under section
11(h) of the Bank Act, 12 U.S.C. 1431(h), and under part 956 of the
proposed rule, to the extent that such investments are for the purpose
of aiding members. The member matching requirement will be deemed to
satisfy the statutory requirement that Bank investments in SBICs be for
the purpose of aiding members.
6. Other CMA Investments--Sec. Sec. 940.3(a)(7), (a)(8) and (a)(9)
Three other specific investments would qualify as CMA under
proposed Sec. Sec. 940.3(a)(7), (a)(8) and (a)(9): The short-term
tranche of SBIC securities guaranteed by the Small Business
Administration (SBA); Section 108 Interim Notes and Participation
Certificates guaranteed by HUD pursuant to section 108 of the Housing
and Community Development Act of 1974 (as amended), 42 U.S.C. 5308; and
investments and obligations for housing and community development
issued or guaranteed under Title VI of the Native American Housing
Assistance and Self-Determination Act of 1996 (NAHASDA), 25 U.S.C. 4191
through 4195. These investments are all related to housing and
community lending and supported by various government programs at the
federal level. The Finance Board proposes to treat these investments as
CMA because of their potential to move the private markets to better
assist low- and moderate-income communities to become more prosperous.
By treating these investments as CMA, the Finance Board would be
intentionally creating a greater incentive for the Banks to make these
investments.
The Finance Board specifically requests comment on whether any
other investment instruments that are products of federal programs
designed to support housing and community lending programs, should also
be included as CMA.
7. Status of MBS and HFA Bonds Acquired Under the FMP--Sec. 940.3(b)
As discussed previously, the proposed rule would neither prohibit
the Banks from making any investments that they are currently permitted
to make under the FMP, nor restrict the extent to which the Banks may
fund any particular investments with the proceeds of COs. Proposed
Sec. 940.3(b) would make clear that, should the Finance Board enact any
such prohibitions or restrictions at some future date, the agency will
not limit the authority of a Bank to hold to maturity, or fund with the
proceeds of COs, any investments made under sections II.B.8., 9., 10.
or 11. of the FMP on or before April 12, 2000 (the date the Finance
Board adopted this proposed rule), except as may be necessary to ensure
the safety and soundness of the Banks.
These investments include: agency and highly-rated private MBS;
highly-rated securities backed by manufactured housing or home equity
loans; and state or local HFA bonds. While HFA bonds issued by,
through, or on behalf of a member or associate will qualify as AMA
under proposed part 955 (and, thus, also as CMA), those that are issued
by, through, or on behalf of outside parties do not so qualify.
Although, under part 956 of the proposed rule, Banks may continue to
invest in nonmember or associate-related HFA bonds, these would not
qualify as CMA. Similarly, neither MBS, nor securities backed by
manufactured housing or home equity loans, would qualify as CMA under
the proposed rule.
B. Advances to Out-of-District Members and Associates--Sec. 950.18
The proposed rule would add to the Finance Board's advances
regulation a new Sec. 950.18, which would govern Bank creditor
relationships with out-of-district members and associates. Proposed
Sec. 950.18(a) would expressly permit a Bank to purchase an outstanding
advance, or a participation interest therein, from another Bank, or to
establish a debtor/creditor relationship with a Bank System member or
associate in another district at the time an advance is made, subject
to an arrangement with the member's or associate's local Bank. Proposed
[[Page 25681]]
Sec. 950.18(b) would make clear that any debtor/creditor relationship
established pursuant to Sec. 950.18(a) would be subject to all of the
appropriate advances requirements of part 950. The Finance Board is
proposing this addition to its regulations at this time in order to
make explicit the parallel treatment of advances and AMA transactions,
in which Banks may engage as an incidental aspect to their advances
authority.
C. Acquired Member Assets--Part 955
Part 955 of the proposed rule addresses AMA--that is, assets that a
Bank may acquire from or through its members or associates in a
transaction that is in purpose and economic substance functionally
equivalent to the business of making advances in that: (1) It allows
the member or associate to use its eligible assets to access liquidity
for further mission-related lending; and (2) all, or a material portion
of, the credit risk attached to the assets is being borne by the member
or associate.
Proposed Sec. 955.1 would set forth definitions of terms used in
part 955. These are discussed below in the context of the substantive
provisions.
1. Authorization to Hold AMA--Sec. 955.2
Section 955.2 of the proposed rule generally would authorize each
Bank to hold AMA acquired from or through Bank System members or
associates, either by a purchase or a funding transaction, subject to
the procedural new business activity requirements contained in proposed
part 980 (which was proposed as part of the Finance Board's recently-
adopted proposed rule on advances collateral and is described in more
detail below). Proposed Sec. 955.2 would also set forth a three-pronged
test to be used in determining which assets qualify as AMA.
First, under proposed Sec. 955.2(a), whole loans that are eligible
to secure advances to members under the Finance Board's proposed
advances collateral regulation (proposed to be codified at Sec. 950.7),
could qualify as AMA. These assets include: (1) Fully disbursed, whole
first mortgage loans on improved residential real property not more
than 90 days delinquent; (2) mortgages or other loans, regardless of
delinquency status, to the extent that the mortgage or loan is insured
or guaranteed by the U.S. or any agency thereof, or otherwise backed by
the full faith and credit of the U.S.; (3) other real estate-related
whole loans, provided that such loans have a readily ascertainable
liquidation value and can be freely liquidated in due course and the
Bank can perfect a security interest therein; and (4) when acquired
from community financial institutions (CFIs) only, small business,
small farm or small agri-business loans fully secured by collateral
other than real estate, or securities representing a whole interest in
such loans, provided that such loans have a readily ascertainable
liquidation value and can be freely liquidated in due course and the
Bank can perfect a security interest in such loans. Under this
provision, single-family mortgages where the loan amounts exceed the
conforming loan limits that apply to the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), see 12 U.S.C. 1717(b)(2), could not qualify as AMA. In
addition, loans made to an entity, or secured by property, not located
within a state of the United States, the District of Columbia, American
Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto
Rico, or the U.S. Virgin Islands could not qualify as AMA.
In addition, under proposed Sec. Sec. 955.2(a)(2) and (3), whole
loans secured by manufactured housing, regardless of whether such
housing qualifies as residential real property, and state and local HFA
bonds, respectively, could qualify as AMA. While manufactured housing
loans may under some circumstances qualify as ``other real estate-
related'' collateral eligible to secure advances, the Finance Board has
chosen to list such loans explicitly in proposed Sec. 955.2(a) in order
to make clear that such loans could qualify as AMA.
Second, under proposed Sec. 955.2(b), an asset must have some
connection with a Bank System member or associate in order to qualify
as AMA--i.e., there must be a member or associate nexus. Specifically,
proposed Sec. 955.2(b)(1) would require that the asset be either: (i)
Originated (if a loan) or issued (if a bond) by, through, or on behalf
of a member or associate, or affiliate thereof; or (ii) held for a
valid business purpose by the member or associate, or affiliate
thereof, prior to acquisition by a Bank. The reference in the proposed
rule to assets issued ``through, or on behalf of'' a member, associate
or affiliate is intended to encompass HFA bonds issued by an
underwriter for the member, associate or affiliate.
The valid business purpose requirement is intended to account for
the fact that a member may acquire loans from a nonmember during the
normal course of business and then sell those loans to the Bank. The
reference to a ``valid business purpose'' is intended to exclude any
loans that are passed from a nonmember through a member to a Bank with
the intent to extend the benefits of Bank membership to the nonmember.
Under proposed Sec. 955.2(b)(2), the assets must be acquired from
either: (i) A member or associate of the Bank acquiring the assets;
(ii) a member or associate of another Bank, pursuant to an arrangement
with that Bank; or (iii) another Bank. Under the proposed rule, a Bank
could acquire initial-offering taxable HFA bonds from out-of-district
associates, provided that the Bank has an agreement with the
associate's district Bank granting permission to make such
acquisitions.
Third, under proposed Sec. 955.2(c), the member or associate must
meet the credit risk-sharing sharing requirements that are detailed in
proposed Sec. 955.3. As an exception to this requirement, the Finance
Board would consider assets acquired under authorizations adopted by
the Finance Board pursuant to section II.B.12. of the FMP to qualify as
AMA, up to the total dollar cap contained in those authorizations, even
if the transactions do not meet the credit risk-sharing requirements of
proposed Sec. 955.3.
2. Required Credit Risk-Sharing Structure--Sec. 955.3
Section 955.3 of the proposed rule would elaborate upon the credit
risk-sharing requirement that is the third prong of the AMA test set
forth in proposed Sec. 955.2. The risk-sharing requirements proposed in
Sec. 955.3 are based on risk-sharing structures that have evolved over
time and are currently in place at the Banks. Since the first approval
of the Federal Home Loan Bank of Chicago's Mortgage Partnership Finance
(MPF) pilot program in late 1996, the Banks have gained experience in
the acquisition of single-family mortgage assets and the Finance Board
has gained experience in monitoring such acquisitions. Commensurate
with this increased expertise, the Finance Board authorized an expanded
scope of mortgage purchase activity in Resolution No. 98-41 (Sept. 23,
1998), which permitted all Banks to offer MPF, or substantially similar
programs, to their members on a pilot basis. Later, to accommodate
member needs concerning capital requirements, the Finance Board
authorized an alternative risk-sharing structure in Resolution No. 99-
50 (Oct. 4, 1999). With this approval, members were able to share a
portion of the credit risk associated with mortgage lenders, through
the use of supplemental loan-level insurance. By purchasing mortgage
insurance to cover a portion of the
[[Page 25682]]
credit risk, members receive more favorable capital treatment.
Through the credit risk-sharing requirement, AMA activities would
serve to promote and preserve the basic business relationship between
the Banks and their members that has been established and maintained
throughout the history of the Bank System through advance transactions.
The Bank would manage the interest rate risk, while the member would
manage a material portion of the credit risk. This requirement
emphasizes the cooperative nature of the Bank System by ensuring that
the member or associate shares with the Bank the financial benefits and
responsibilities of the asset. Based on the totality of its experience
in monitoring the Banks' mortgage purchase programs, the Finance Board
is confident that the credit risk-sharing requirements set forth in
proposed Sec. 955.3 would efficiently allocate risks so as to best use
the core competencies of the entities involved and provide capital
market funding and risk management alternatives, all to the ultimate
benefit of the consumer.
Under proposed Sec. 955.3(a)(1), a Bank would be required to
determine, at the time of acquisition of member assets: (i) The
expected credit losses on the asset or pool of assets; and (ii) the
total credit enhancement that is necessary to raise the asset or pool
of assets to at least the fourth highest credit rating category, or
such higher credit rating as the Bank may require. At a minimum, at the
time of acquisition, each asset or pool of assets would be required to
have an estimated credit rating of at least the fourth highest rating
category. However, the Bank may choose to require that individual pools
of assets have a credit rating above the fourth highest rating
category.
Under proposed Sec. 955.3(a)(2), the Bank's estimates of the
expected credit losses and total credit enhancements would be required
to be calculated using a methodology that is confirmed in writing by a
Nationally Recognized Statistical Rating Organization (NRSRO) to be
comparable to a methodology that an NRSRO would use in conducting a
formal rating review of the assets or pools of assets. Requiring that
the methodology used to determine expected credit losses and credit
enhancements be affirmed by an NRSRO would ensure that the Bank's
estimates of credit ratings are reasonably accurate. The methodology
used to estimate the expected credit losses and credit enhancements
would be required to produce roughly the equivalent rating, or
equivalent ratings on average, to a formal rating review of the assets
or pools of assets. Given that an NRSRO conducting a formal rating of
an asset or pool of assets may take into account qualitative factors
that may not be considered by a theoretical model, the estimate of
expected credit losses and credit enhancement by a Bank would not be
required to be identical to that determined by an NRSRO. However, the
estimate must produce approximately the equivalent rating.
Second, under proposed Sec. 955.3(b), a Bank would be required to
determine a credit risk-sharing structure to be entered into with its
member or associate that both: (1) Enhances the asset or pool of assets
to at least the fourth highest credit rating category, or such higher
credit rating as required by the Bank; and (2) incorporates credit
risk-sharing with the member or associate.
When establishing an AMA program, the credit enhancement structure
would be required to be designed in such a way that it at least
supports the asset or pool of assets to the fourth highest credit
rating category or such higher credit rating as required by the Bank.
More specifically, if the Bank acquires a member asset and requires,
for example, the second highest rating, the methodology used to assign
financial responsibilities to support that rating would be required to
conform to a structure that has been confirmed in writing by an NRSRO
as sufficient to achieve the desired rating. For example, one factor
that may be considered in determining the methodology used under a
credit enhancement structure may be the order in which credit losses
are allocated among entities. If a Bank makes modifications to a credit
enhancement structure that is already in place, it would be required to
obtain written confirmation from an NRSRO that the new structure is
sufficient to achieve the desired rating.
At the same time that a Bank determines a credit enhancement
structure that supports the credit rating of an asset or pool of
assets, the Bank would be required to implement a credit risk-sharing
structure with the member or associate from which the Bank acquired the
asset or pool of assets. The proposed rule would require that the risk-
sharing structure be established in one of two ways: (i) The member or
associate from which the Bank acquired an asset or pool of assets
directly bears the economic consequences of all credit losses in excess
of expected losses up to the fourth highest credit rating or such
higher credit rating as required by the Bank; or (ii) the member or
associate from which the Bank acquired an asset or pool of assets
directly bears the economic consequences of all credit losses up to the
amount of expected losses, and the member or associate assumes
responsibility for additional credit losses as is necessary to enhance
the asset or pool of assets to the fourth highest credit rating
category, or such higher rating as required by the Bank.
Under either structure, expected losses would have to be estimated
by a Bank as required pursuant to proposed Sec. 955.3(a). In other
words, the Bank would need to determine the expected losses on an asset
or pool of assets using a methodology that is confirmed in writing by
an NRSRO to be comparable to a methodology that an NRSRO would use in
conducting a formal rating review of an asset or pool of assets.
Recognizing that advantages exist under each structure, the Finance
Board is proposing that the Banks be given flexibility to offer
products or programs under either of the structures. However, any
combination of the requirements set forth in the two separate
structures would be prohibited. Under both of these structures, members
would directly bear the responsibility for a material portion of credit
risk, whether it is borne as expected losses or in excess of expected
losses. By allowing the flexibility to use either structure, members
would be able to choose the program that best suits their needs. Under
the first structure, the member would bear a larger portion of credit
risk. Under the second structure, the member would be responsible for
the first layer of losses, thereby linking the member's compensation to
the credit quality of the asset.
Under the first structure, the member or associate from which a
Bank acquired an asset or pool of assets would be required to bear
directly the economic consequences of all credit losses in excess of
expected losses. The Bank could bear economic responsibility for the
expected credit losses on an asset or pool of assets. In general,
expected credit losses are roughly ten percent of the credit
enhancement necessary to raise the asset or pool of assets to the
second highest credit rating. Under this structure, the Bank would bear
responsibility for a relatively small amount of credit losses and the
member would take on the relatively larger amount of credit risk. Under
the second structure, the member or associate would directly bear
responsibility for the expected losses but the larger portion of credit
risk may be allocated among different entities. Under the second
structure, only the member or associate from which the Bank acquired an
asset or pool of assets would be permitted to bear directly the
economic
[[Page 25683]]
responsibility of all credit losses up to an amount at least equal to
the expected credit losses on an asset or pool of assets. The Bank
would not be permitted to bear the economic responsibility for the
expected credit losses on a given asset or pool of assets. Also,
neither affiliates of members or associates that may have originated or
held for a valid business purpose an asset or pool of assets, nor any
other member or associate in the Bank's district could bear the
economic responsibility of expected credit losses on an asset or pool
of assets. The member or associate itself would be required to bear the
economic responsibility of the expected credit losses to ensure member
or associate involvement and to ensure that the member or associate
bears the consequences of the credit quality of the asset or pool of
assets.
The economic responsibility of the expected credit losses may be
borne by the member or associate in a variety of ways. For instance,
under the product developed by the Federal Home Loan Bank of Chicago
known as MPF 100, a Bank establishes an account to absorb
credit losses. As the Bank incurs losses, it is reimbursed by the
member through the reduction of credit enhancement fees paid to the
member by the Bank. Essentially, the fees paid to the member are
contingent upon the performance of the asset.
The Finance Board has determined that expected credit losses are
typically of sufficient size that members or associates, when
responsible for such losses, have incentive to seek ways to achieve
better than expected performance. In the case of acquiring mortgage
loans, by requiring that the member or associate bear economic
responsibility for expected credit losses, a system of risk and reward
is established that is based on the core competencies of the
participating institutions. Since member financial institutions are
most knowledgeable regarding their local housing markets, this
structure allows members the opportunity to benefit from their
expertise in underwriting mortgage loans in their communities. The
credit risk sharing structure is based on the concept that different
institutions have different capacities. The Banks are capital market
specialists, with the ability to bear market risks well, while
depository institutions are experts in credit risk evaluation since
they know their communities best. Therefore, by establishing a
structure where the member or associate from which the Bank acquired
the asset or pool of assets bears economic responsibility for the
amount of the expected credit losses, members or associates are
rewarded for their credit risk management expertise.
In addition to the member or associate from which the Bank acquired
an asset or pool of assets bearing the economic responsibility of
credit losses up to the amount of expected credit losses, the member or
associate from which the Bank acquired an asset or pool of assets would
be required to provide for additional credit loss coverage such that
the member's or associate's total credit enhancement responsibility
(i.e., expected credit losses plus additional credit loss coverage) is
sufficient to achieve at least the fourth highest credit rating, or
such higher rating as required by the Bank. The additional credit loss
coverage would have to be provided by the member or associate from
which the Bank acquired the asset or pools of assets, but under
proposed Sec. 955.3(b)(2)(ii)(B), the member or associate may allocate
the additional credit loss coverage responsibility in whole or in part,
and in any combination, among: (1) The member or associate itself; (2)
any other member or associate in the Bank's district; and (3) loan-
level insurance, including U.S. government insurance or guarantee.
It would be the responsibility of the member or associate from
which the Bank acquired the asset or pool of assets to determine the
allocation of the additional credit loss coverage among itself, any
other member or associate in the Bank's district and any insurer. If
loan-level insurance is used, proposed Sec. 955.3(b)(2)(ii)(B)(3) would
require that the insurer be rated not lower than the second highest
rating category and the member or associate be legally obligated at all
times to transfer or replace the equivalent insurance should the
insurer be downgraded below the second highest rating category.
The use of loan-level insurance is to provide the member or
associate from which the Bank acquired the asset or pool of assets more
favorable capital treatment. The member or associate may also allocate
its additional credit loss coverage requirement to the U.S. government
either through government insurance or guarantee.
Regardless of how the additional credit loss coverage is allocated
among the above-mentioned entities, the expected credit losses must be
borne by the member or associate from which the Bank acquired the asset
or pool of assets. In the case of an FHA-insured loan, the loan would
meet the risk-sharing requirements since it is insured by the
government; however, the member or associate would have to bear the
economic responsibility of all unreimbursed servicing expenses, up to
the amount of expected losses on the loan or loan pool. The same would
be true of VA-guaranteed loans and RHS-insured loans. In the case of
HFA bonds, the bonds would meet the proposed required credit risk-
sharing structure because any losses beyond the insurance or guarantee
would be borne by the HFA, not the Bank. HFA bonds are usually rated in
at least the third highest credit rating category based on the fact
that the bonds are backed by FHA-insured, VA-guaranteed or private
mortgage insurance (PMI)-insured whole loans. In many cases the bonds
are backed by loans securitized by the Government National Mortgage
Association (Ginnie Mae), Fannie Mae or Freddie Mac and are rated in
the highest credit rating category. Additional bondholder protections
frequently include mortgage reserve funds.
3. Reporting Requirements for AMA--Sec. 955.4
Proposed Sec. 955.4 addresses the Banks' reporting requirements for
AMA that are residential mortgages. The Finance Board is proposing to
require Banks that acquire single-family and multifamily mortgage
assets to submit to the Finance Board quarterly mortgage reports, which
will include semi-annual loan-level reporting.
Proposed Sec. 955.4(a)(1) would require that loan-level data be
collected and maintained by each Bank acquiring AMA that are
residential mortgages. The Finance Board has specified two lists of
loan-level data elements: the first for single-family loans and the
second for multifamily loans. These lists are included as appendices to
the proposed rule. The data collected are intended to be used to create
a data base and reporting infrastructure for monitoring the Banks' risk
management and achievement of the public purpose of their residential
mortgage purchase programs on a par with that now imposed on Fannie Mae
and Freddie Mac. Thus, the information proposed to be collected by the
Finance Board is largely similar to information required to be reported
to HUD and the Office of Federal Housing Enterprise Oversight (OFHEO)
by Fannie Mae and Freddie Mac.
A few of the data items proposed to be collected are not regularly
reported by Fannie Mae and Freddie Mac to either HUD or OFHEO. The
Finance Board is proposing to collect originating lender name, city and
state for both single-family and multifamily acquisitions. Fannie Mae
and Freddie Mac are only required to report on the
[[Page 25684]]
lender from which they acquired the loans. Under proposed
Sec. 955.2(b)(1)(ii), the Banks are permitted to acquire loans held for
a valid business purpose by a Bank System member or associate or
affiliate. In order to monitor compliance with this provision, data on
the originating lender are necessary.
``Front-end ratio'' and ``back-end ratio'' are two additional items
that Fannie Mae and Freddie Mac do not regularly report to either HUD
or OFHEO, but collect and maintain for underwriting and credit scoring
purposes. HUD collected this information as part of its examination of
the GSEs' automated underwriting processes. The Finance Board is
proposing to collect this information to evaluate the risk of acquired
loans, and possibly to examine the extent to which the Banks' programs
are reaching borrowers not served by the conventional market. ``Self-
employment indicator'' is not provided by Fannie Mae and Freddie Mac to
its regulators. However, the Finance Board is proposing to collect this
information because the agency believes that it will be useful to
assess risk and to examine the extent to which the Banks' programs are
reaching borrowers not served by the conventional market. Lastly,
``prepayment penalties'' for single-family loans is not reported by
Fannie Mae and Freddie Mac, but is reported for multifamily loans to
OFHEO. Prepayment penalties were rarely used by single-family lenders,
but have begun to grow in popularity. The Finance Board is proposing to
collect this information to examine prepayment speeds so that the
market risk of the loans may be calculated.
A number of the items on the lists are not applicable to current
AMA programs. As proposed, the lists were compiled as broadly as
possible to accommodate future programs. Under proposed
Sec. 955.4(a)(2), the list of required loan-level elements may be
revised by the Finance Board from time-to-time through the notice-and-
comment rulemaking process.
Under proposed Sec. 955.4(b), within 60 days of the end of every
quarter of every calendar year, the Banks that hold AMA that are
residential mortgages would be required to submit a mortgage report, in
a format to be determined by the Finance Board, that includes
aggregations of the loan-level mortgages. The mortgage report would
include year-to-date dollar volume, number of units, and number of
mortgages on owner-occupied and rental properties acquired by the Bank.
The mortgage report for the second and fourth quarters would be
required to include, in addition to the aggregate mortgage report
submitted every quarter, year-to-date loan-level data consisting of the
data elements addressed in proposed Sec. 955.4(a). The Banks would be
required to submit the mortgage reports to the Finance Board in a
machine readable format, to be specified by the Finance Board. Under
proposed Sec. 955.4(c), the Finance Board could, at any time, require
reports in addition to those specified in proposed Sec. 955.5(b).
The Finance Board is not at this time proposing the establishment
of goals related to mortgage assets. To date, AMA mortgage asset volume
is small relative to the mortgage market and, as discussed below, the
Banks' balance sheets largely consist of loans that are regionally
concentrated. Nonetheless, the Finance Board has begun to consider the
establishment of goals. Since AMA programs, such as MPF, provide
members with an alternative to selling loans in the secondary market,
staff has reviewed the characteristics of MPF loans in the context of
the GSE Housing Goals imposed on Fannie Mae and Freddie Mac as required
under the Federal Housing Enterprises Financial Safety and Soundness
Act of 1992 (FHEFSSA). 12 U.S.C. 4541 et seq.
FHEFSSA directs HUD to establish the target levels for three
separate goals for the GSEs' mortgage purchases. These three goals are:
(1) A low- and moderate-income goal, intended to achieve increased
purchases by the GSEs of mortgages on housing for low- and moderate-
income families; (2) a central cities, rural areas, and other
underserved areas goal, intended to achieve increased purchases by the
GSEs of mortgages financing housing in areas that are underserved in
terms of mortgage credit; and (3) a special affordable housing goal,
intended to achieve increased purchases by the GSEs of mortgages on
owner-occupied and rental housing to meet the unaddressed need of, and
be affordable to, low-income families in low-income areas and very low-
income families.
FHEFSSA directs HUD to determine the target levels for the GSE
Housing Goals after considering the following six factors: (1) National
housing needs; (2) economic, housing and demographic conditions; (3)
performance and effort of Fannie Mae and Freddie Mac toward achieving
the Housing Goals in previous years; (4) the size of the conventional
mortgage market serving the targeted population or areas relative to
the size of the overall conventional mortgage market; (5) the ability
of the GSEs to lead the industry in making mortgage credit available
for the targeted population or areas; and (6) the need to maintain the
sound financial condition of the GSEs.
Currently, factors exist that impede a proper evaluation of MPF
loans with respect to the GSE Housing Goals. One of these factors is
the size of the MPF portfolio. MPF loans outstanding on the Banks'
balance sheets are small relative to the size of the mortgage market
and the size of Fannie Mae's and Freddie Mac's portfolios. Because MPF
business has occurred only over a limited time period and with a
relatively small number of member institutions, MPF is not yet
representative of the broader market. Under MPF, the majority of the
loans have been acquired on properties located in a single state
(Wisconsin), while the GSE Housing Goals are established to reflect
relevant criteria at the national level. Additionally, under MPF, the
Banks are acquiring only single-family loans, while the GSE Housing
Goals are established to reflect the inclusion of multifamily loans and
a number of other types of loans that Fannie Mae and Freddie Mac
currently purchase, and which are considered when HUD sets the targets
for the GSE Housing Goals.
Under the proposed rule, the Banks would be explicitly permitted to
acquire multifamily mortgage assets, so long as the new business
activity requirements of proposed part 980 (which is included in the
Finance Board's recently-adopted proposed rule on advances collateral,
and which is discussed in more detail below) are met. Prior to this
proposed rule, the Banks have had only limited authority to acquire
multifamily mortgage assets. This authority was not granted under
Finance Board Resolution No. 99-50, which authorized only single-family
mortgage programs.
According to two recent HUD reports on rental housing,\3\ for
various reasons, the supply of affordable rental housing has fallen
short of the need. Moreover, absent concerted measures to address the
problem, this trend will continue as the age of the existing affordable
rental housing stock increases. In order to help address this need, the
Finance Board is not only proposing to authorize the acquisition of
multifamily member assets, but is encouraging the Banks to become
active participants in this market. As GSEs, the Banks have a public
purpose to provide liquidity to underserved markets. Given the demand
for affordable rental housing, the Banks are encouraged to expand their
[[Page 25685]]
community partnerships and offer members competitive alternatives in
the multifamily mortgage market.
---------------------------------------------------------------------------
\3\ Department of Housing and Urban Development, Rental Housing
Assistance--The Crisis Continues: The 1997 Report to Congress on
Worst Case Housing Needs (April 1998) and Waiting in Vain--An Update
on America's Rental Housing Crisis (March 1999).
---------------------------------------------------------------------------
Although the factors mentioned above limit the validity of any
comparison of MPF to the GSE Housing Goals, the Finance Board has
sought to examine how well MPF loans compare to the GSE Housing Goals,
controlling, to the extent possible, for the factors noted above.
Overall, the data suggest that the distribution of MPF loans compares
favorably to the GSE Housing Goals when single-family loans are
isolated. The Finance Board's analysis has shown that, as of year-end
1999, MPF has exceeded the special affordable housing goal and met the
low-and moderate-income goal for 1999. However, the program has fallen
short of the central cities, rural areas, and other underserved areas
housing goal for 1999. Given that the underlying factors used in
establishing the target for the central cities, rural areas, and other
underserved areas housing goal assume a national program, it is not
surprising that MPF loans did not achieve this goal. Because the
majority of MPF loans are located in Wisconsin, a regional bias exists
that particularly impacts the compliance of the MPF program with this
goal.
The Finance Board anticipates implementing demographic goals, as
determined by the Finance Board in due consideration of the existing
GSE Housing Goals, at such time as the conventional residential
mortgage programs of the Banks, in the aggregate, have achieved a size
and scope indicative of a mature program. For example, a mature program
for the Banks' conventional residential mortgage programs might be
deemed to exist beginning in the year that the annual aggregated
acquisition volume for all conventional residential mortgage programs
for the Bank System exceeds 100,000 loans or $10 billion. Once either
100,000 loans or $10 billion in loans are acquired within a one-year
period, such a program presumably would be national in scope.
Similarly, a smaller set of programs, under which 75,000 loans are
acquired within a one-year period, could also be considered national in
scope if it were geographically dispersed among more than half of the
Banks--for example, with seven different Banks accounting for at least
ten percent of the loan acquisition volume.
Ideally, any benchmark for the implementation of program goals will
be empirically based. The possible 100,000 loan trigger is derived from
the estimated number of loans acquired by Freddie Mac in 1992, the
first year goals were imposed on the GSEs. The number of Freddie Mac
loans may be an appropriate benchmark because Freddie Mac is the
smaller of the two housing GSEs, yet its activity is national in scope.
The alternative criteria would allow that a sufficient volume may
occur at less than 100,000 loans but only if the program is clearly
national in scope. The criterion that 7 different Banks account for at
least 10 percent of the acquired conventional residential mortgage
volume would ensure a geographically diverse pool at the lower loan
total and ensure that no one Bank accounts for more than 40 percent of
volume if the program is to be considered national in scope. The
Finance Board specifically requests comment on the proposed measure of
program maturity discussed above.
The statutorily established GSE Housing Goals will eventually be
used as a baseline in determining the goals and targets for AMA that
are residential mortgages. However, in establishing goals, the Finance
Board will conduct research and analysis beyond the GSE Housing Goals
in order to establish the most suitable goals and targets given the
factors surrounding AMA residential mortgage programs. Until goals for
the Banks' residential mortgage AMA programs are established, the
Finance Board will continue to monitor the Banks' AMA portfolios that
consist of residential mortgages with reference to the GSE Housing
Goals. Any housing goals that may be implemented will be subject to the
notice-and-comment rulemaking process.
4. Administrative and Investment Transactions Between Banks--Sec. 955.5
Proposed Sec. 955.5 addresses the delegation of administrative AMA
program duties and terminability of AMA program agreements between
Banks. Under proposed Sec. 955.5(a), a Bank would be permitted to
delegate the administration of an AMA program, including the
fulfillment of regulatory reporting requirements, to another Bank whose
administrative office has been examined and approved by the Finance
Board to process AMA transactions. Further, the proposed rule would
require that the existence of such a delegation, or the possibility
that such a delegation may be made, be disclosed to any potential
participating member or associate before any AMA-related agreements are
signed with that member or associate.
Proposed Sec. 955.5(b) would require that any agreement made
between two or more Banks in connection with any AMA program be made
terminable by either party after a reasonable notice period. Under this
provision, no Bank could be required to fund, purchase, sell, or
process any new AMA after the termination of such an agreement.
5. Risk-Based Capital Requirement for AMA--Sec. 955.6
Under proposed Sec. 955.6, each Bank must hold retained earnings
plus specific loan loss reserves as support for the credit risk of all
AMA estimated by the Bank to be below the second highest credit rating
in an amount equal to or greater than: the outstanding balance of the
assets or pools of assets, times a factor associated with the credit
rating of the assets or pools of assets as determined by the Finance
Board.
The proposed rule would allow Banks to hold AMA that is of a credit
quality that, though still of an investment grade, is less than what
has typically been permitted by the Finance Board under the FMP for
Bank investments. This provision is intended to ensure the safety and
soundness of any exercise of the Banks' expanded authority prior to the
implementation of a risk-based capital regulation. The credit risks and
operational aspects of managing AMA assets are the same as those faced
by regulated banking institutions, and such institutions are required
to maintain risk-based capital to offset these risk factors. The ratio
of retained earnings plus loan loss reserves should reflect losses
based on the default rates of similarly rated securities (based on the
credit rating achieved by the AMA assets once acquired by the Bank and
including all loss accounts and credit enhancements). The methodology
to determine the long-term default rate factor associated with the
credit rating will be discussed in the upcoming risk-based capital
rulemaking.
D. Amendments to Part 956--Investments
The proposed rule would replace in its entirety existing part 956
of the Finance Board's regulations, which governs Bank investments
(prior to the recent reorganization of the Finance Board's regulations,
see 65 FR 8253 (Feb. 18, 2000), the investment regulations were
contained in 12 CFR 934.1, 934.2 and 934.13).
Under sections 11(g), 11(h) and 16(a) of the Bank Act, 12 U.S.C.
1431(g), 1431(h), 1436(a), a Bank may, subject to the rules and
regulations of the Finance Board, invest in: (1) Obligations of the
United States, see id. Secs. 1431(g), 1431(h) and 1436(a); (2) deposits
in banks or trust companies, see id. Sec. 1431(g); (3) obligations,
participations or other instruments of, or issued by, Fannie
[[Page 25686]]
Mae or Ginnie Mae, see id. Secs. 1431(h), 1436(a); (4) mortgages,
obligations, or other securities that are, or ever have been sold by
Freddie Mac, see id. Secs. 1431(h), 1436(a); (5) stock of Fannie Mae,
see id. Sec. 1431(h); (6) stock, obligations, or other securities of
any SBIC formed pursuant to 15 U.S.C. 681(d) (to the extent the
investment is made for purposes of aiding Bank members), see 12 U.S.C.
1431(h); and (7) instruments that the Bank has determined are
permissible investments for fiduciary and trust funds under the laws of
the state in which the Bank is located, see id. Secs. 1431(h), 1436(a).
Currently, Sec. 956.2 of the regulations (formerly Sec. 934.1)
limits the Banks' statutory investment authority by permitting a Bank
to make investments only pursuant to specific authorizations of the
Finance Board, or in conformity with ``stated [Finance] Board policy.''
12 CFR 956.2(a). Since 1991, the ``stated policy'' referred to in the
regulation has been the FMP, which, among other things, sets forth a
list of permissible Bank investments that is narrower than that which
could be permitted under the statute.
The investments authorized under section II.B. of the FMP are: (1)
Overnight and term federal funds with a remaining term to maturity not
exceeding nine months; (2) overnight and term resale agreements with a
remaining term to maturity not exceeding nine months; (3) United States
dollar deposits with a remaining term to maturity not exceeding nine
months; (4) commercial paper, bank notes and thrift notes traded in
U.S. financial markets and rated P-1 (by Moody's) or A-1 (by Standard &
Poor's) with a remaining term to maturity not exceeding nine months;
(5) banker's acceptances with a remaining term to maturity not
exceeding nine months; (6) marketable obligations issued or guaranteed
by the United States; (7) marketable direct obligations of United
States government-sponsored agencies and instrumentalities, for which
the credit of such institutions is pledged for the repayment of both
principal and interest; (8) MBS issued, guaranteed or fully insured by
Ginnie Mae, Fannie Mae, or Freddie Mac, or collateralized mortgage
obligations (CMOs) or real estate mortgage investment conduits (REMICs)
backed by such MBS; (9) other MBS, CMOs and REMICs rated Aaa (by
Moody's) or AAA (by Standard & Poor's); (10) asset-backed securities
collateralized by manufactured housing loans or home equity loans and
rated Aaa (by Moody's) or AAA (by Standard & Poor's); (11) marketable
direct obligations of state or local government units or agencies,
rated at least Aa (by Moody's) or AA (by Standard & Poor's), where the
purchase of such obligations by a Bank provides to the issuer the
customized terms, necessary liquidity, or favorable pricing required to
generate needed funding for housing or community development; and (12)
upon the fulfillment of certain conditions, and with the prior approval
of the Finance Board, other investments that support housing and
community development.
Under proposed part 956, the Banks would no longer be limited to a
list of specific, approved investments. Instead, proposed Sec. 956.2
would permit the Banks to hold all of the investments that are
authorized under the Bank Act (with the exception of Fannie Mae common
stock), subject to the safety and soundness restrictions set forth in
proposed Sec. 955.3, and subject to the procedural requirements
contained in proposed part 980 (which was proposed as part of the
Finance Board's recently-adopted proposed rule on advances collateral
and is described in more detail below).
The only investment that is explicitly enumerated in the Bank Act
that would not be permitted under proposed Sec. 956.2 is investment in
the stock of Fannie Mae. As discussed below, proposed Sec. 956.3(a)(1)
would prohibit Banks from investing in instruments that provide an
ownership interest in an entity, with an exception for equity
investments that qualify as core mission activities under proposed part
940. Because the Finance Board does not believe that Fannie Mae stock
could under any circumstances qualify as a core mission activity, and
because Fannie Mae stock is not an authorized investment under the FMP
and is not currently held as an investment by any Bank, it has been
omitted from the list of authorized investments in proposed Sec. 956.2.
Both sections 11(h) and 16(a) of the Bank Act state that the Banks
may be authorized to invest in ``such securities as fiduciary and trust
funds may be invested in under the laws of the state in which the * * *
Bank is located.'' See 12 U.S.C. 1431(h), 1436(a). In implementing this
authority through Sec. 956.2(f) of the proposed rule, the word
``instruments'' has been substituted for the word ``securities'' to
reflect in the proposed rule the Finance Board's construction of the
term ``securities,'' as used in sections 11(h) and 16(a) of the Bank
Act, to encompass the broad range of financial investment instruments
and not merely those instruments that are within the technical
definition of ``securities'' set forth in the federal securities laws.
See 15 U.S.C 77b(1).
The broad investment authority established under proposed
Sec. 956.2 would be limited by a number of safety and soundness-related
restrictions set forth in proposed Sec. 956.3. For reasons of safety
and soundness, proposed Sec. 956.3(a)(1) generally would prohibit the
Banks from making any investment in instruments that would provide an
ownership interest in an entity (e.g., common or preferred stock,
rights, warrants or convertible bonds). However, in order to permit
Banks to make the types of targeted equity investments that qualify as
core mission activities, the proposed rule would except from this
prohibition equity investments that would qualify as CMA under proposed
Sec. Sec. 940.3(a)(5) and (6). The Finance Board anticipates that such
targeted equity investments would represent only a small portion of a
Bank's balance sheet and that the additional risk associated with such
investments would be mitigated by requiring the Bank to hold adequate
capital against these investments. Although the proposed equity
investment authority is narrow, this authorization would be less
restrictive than what is currently permitted under the FMP, which
permits equity investments only in the stock of SBICs.
Proposed Sec. 956.3(a)(2) would prohibit the Banks from investing
in instruments issued by foreign entities, except United States
branches and agency offices of foreign commercial banks. Such
instruments conceivably could qualify as permissible investments for
fiduciary and trust funds and, therefore, would be permissible Bank
investments unless specifically prohibited. This is consistent with the
current prohibition in the FMP. See Finance Board Res. No. 97-05 (Jan.
14, 1997).
Proposed Sec. 956.3(a)(3) generally would prohibit the Banks from
investing in debt instruments that are not rated as investment grade
(i.e., one of the four highest credit rating categories given by an
NRSRO). In order to permit Banks to invest in CMA that may be below
investment grade, proposed Sec. 956.3(a)(3)(i) would except such CMA
from the prohibition on below-investment grade debt securities. As is
the case with CMA-related equity investments, it is anticipated that
below-investment grade CMA debt investments would represent only a
small portion of a Bank's balance sheet and that the additional risk
associated with such investments would be mitigated by requiring the
Bank to hold adequate capital against these investments. Under proposed
Sec. 956.3(a)(3)(ii), the Banks would not be required to divest
themselves of debt
[[Page 25687]]
instruments that are downgraded to below-investment grade after the
instruments already have been acquired by the Bank.
Under the FMP, the Banks are permitted to invest in debt
instruments that are rated in the third highest credit rating category
or higher, although debt investments that are in the third highest
credit rating category may be held only for a term of one day. Thus,
the authorization set forth in the proposed rule is somewhat broader
than that which is permitted under the FMP.
Finally, proposed Sec. 956.3(a)(4) would prohibit the Banks from
acquiring whole mortgages or other whole loans, or interests in
mortgages or loans, except: (i) AMA acquired under part 955 of the
proposed rule; (ii) marketable direct obligations of state or local
government units or agencies, particularly state or local HFA bonds
that do not qualify as AMA, having at least the second highest credit
rating from a NRSRO, where the purchase of such obligations by the Bank
provides to the issuer the customized terms, necessary liquidity, or
favorable pricing required to generate needed funding for housing or
community lending; (iii) MBS, or asset-backed securities collateralized
by manufactured housing loans or home equity loans, that are
``securities'' under the Securities Act of 1933, 15 U.S.C. 77b(a)(1);
and (iv) loans held or acquired pursuant to section 12(b) of the Bank
Act, 12 U.S.C. 1432(b). As described in detail above, proposed part 955
establishes parameters regarding the types of whole loans that the
Banks may acquire from members and associates and the nature of the
transactions through which such assets may be acquired. Proposed
Sec. 956.3(a)(4)(i) is intended to make clear that part 955 of the
regulations is the sole source of regulatory authority regarding the
Banks' acquisition of whole loans and that any whole loan acquisitions
must meet the requirements of part 955 in order to be permissible.
Under proposed Sec. 956.3(a)(4)(ii), the Banks could continue to
invest in state or local HFA bonds that do not qualify as AMA (i.e.,
those not issued by, through, or on behalf of a Bank System member or
associate). However, HFA bonds not qualifying as AMA also would not
qualify as CMA.
The reference in proposed Sec. 956.3(a)(4)(iii) to MBS and asset-
backed securities that meet the definition of the term ``securities''
in the Securities Act of 1933 is intended to make clear that Banks may
continue to invest in the types of MBS and asset-backed securities that
are commonly available in the securities marketplace, but may not
attempt to circumvent the AMA requirements of proposed part 955 by
deeming unsecuritized pools of mortgages or other loans to be MBS or
asset-backed securities.
Proposed Sec. 956.3(a)(4)(iii) would also except from the loan
investment restriction, housing project loans guaranteed under the
Foreign Assistance Act of 1961, as amended, 22 U.S.C. 2181, 2182, 2184,
which are expressly authorized by Congress as Bank investments under
section 12(b) of the Bank Act. 12 U.S.C. 1432(b).
Proposed Sec. 956.3(b) would prohibit a Bank from taking a position
in any commodity or foreign currency. Proposed Sec. 956.3(b) also
provides that, in the event that a Bank becomes exposed to currency,
commodity or equity risks through participation in COs that are linked
to a foreign currency or to equity or commodity prices, such risks must
be hedged. The Banks currently do not have expertise in these areas and
the Finance Board can discern no reason for the Banks to have or
develop expertise in managing the risks associated with foreign
exchange rates or commodities.
Under proposed Sec. 956.4, the Banks must hold retained earnings
plus specific loan loss reserves as support for the credit risk of all
investments that are not rated by an NRSRO, or are rated below the
second highest credit rating, in an amount equal to or greater than the
outstanding balance of the investments times a factor associated with
the credit rating of the investments as determined by the Finance
Board. It is expected that this specific provision will be superseded
at the time that a final capital rule is promulgated, to be replaced by
specific capital requirements relating to each credit rating category.
Except for those provisions in the FMP that are directly overridden
by this proposed rule, all provisions of the FMP would remain in effect
until expressly repealed by the Finance Board. Accordingly, Bank
investment in agency and private MBS, CMOs and REMICs and in asset-
backed securities secured by manufactured housing or home equity loans
would continue to be limited to a total amount equal to 300 percent of
a Bank's capital. It is anticipated that the remaining provisions of
the FMP will be repealed, or at least codified as regulations, at such
time as the Finance Board promulgates a final rule on capital and risk
management.
E. Effect of Proposed Part 980 of the Recently-Adopted Proposed Rule on
Advances Collateral
As mentioned several times above, under this proposed rule, the
Banks' exercise of their AMA and investment authorities would be
subject to the new business activity procedural requirements set forth
in proposed part 980, which was recently adopted as part of the Finance
Board's proposed rule on advances collateral. Under proposed part 980,
each Bank would be required to provide at least 60 days' prior written
notice to the Finance Board of any new business activity that the Bank
wishes to undertake--including new types of AMA transactions and new
types of investments. While a Bank could proceed with a new business
activity after 60 days if not expressly prevented from doing so by the
Finance Board, proposed part 980 would give the Finance Board the
opportunity to disapprove or restrict such activities, as necessary, on
a case-by-case basis. A ``new business activity'' would include: (1) A
business activity that has not been undertaken previously by that Bank,
or was undertaken previously under materially different terms and
conditions; (2) a business activity that entails risks not previously
and regularly managed by that Bank, its members, or both, as
appropriate; or (3) a business activity that involves operations not
previously undertaken by that Bank. The prior notice requirement would
apply to any Bank desiring to pursue a new activity, even if another
Bank has already undertaken the same activity.
As discussed above, the proposed expansion of the Banks' member
asset and investment authorities would present new management
challenges for the Banks. By making the Banks' exercise of their
authorities under proposed parts 955 and 956 subject to the new
business activity review procedure, the Finance Board would, among
other things, explicitly reserve the right to conduct pre-
implementation safety and soundness examinations of new Bank business
activities and to apply safety and soundness restrictions to such
activities, where necessary.
III. Regulatory Flexibility Act
The proposed rule applies only to the Banks, which do not come
within the meaning of ``small entities,'' as defined in the Regulatory
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance
with section 605(b) of the RFA, see id. at 605(b), the Finance Board
hereby certifies that this proposed rule, if promulgated as a final
rule, will
[[Page 25688]]
not have a significant economic impact on a substantial number of small
entities.
List of Subjects in 12 CFR Parts 900, 940, 950, 955 and 956
Community development, Credit, Federal home loan banks, Housing,
Reporting and recordkeeping requirements.
Accordingly, the Finance Board hereby proposes to amend title 12,
chapter IX, Code of Federal Regulations, as follows:
PART 900--GENERAL DEFINITION
1. The authority citation for part 900 is revised to read as
follows:
Authority: 12 U.S.C. 1422, 1422b(a)(1).
2. Amend Sec. 900.1 by adding, in alphabetical order, a definition
of the term ``acquired member assets or AMA,'' to read as follows:
Sec. 900.1 Definitions applying to all regulations.
* * * * *
Acquired member assets or AMA means those assets that may be
acquired by a Bank under part 955 of this chapter.
* * * * *
3. The heading for part 940 is revised to read as follows:
PART 940--CORE MISSION ACTIVITIES
4. The authority citation for part 940 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1430, 1430b, 1431.
5. In part 940, amend Sec. 940.1 by adding, in alphabetical order,
definitions of the terms ``Financial Management Policy'', ``low- or
moderate-income household'', and ``SBIC'', to read as follows:
Sec. 940.1 Definitions.
* * * * *
Financial Management Policy (FMP) has the meaning set forth in
Sec. 956.1 of this chapter.
Low- or moderate-income household means a household with an income
that is at or below 115 percent of the area median household income, as
published by the Department of Housing and Urban Development.
SBIC means a small business investment company formed pursuant to
15 U.S.C. 681(d).
6. Amend part 940 by adding a new Sec. 940.3, to read as follows:
Sec. 940.3 Core mission activities.
(a) General. The following Bank activities qualify as core mission
activities:
(1) Advances;
(2) Acquired member assets (AMA), except that United States
government-insured or guaranteed whole single-family residential
mortgage loans acquired under a commitment entered into after April 12,
2000 shall qualify based on the following calculations, which, at the
discretion of two or more Banks, may be made based on aggregate
transactions among those Banks:
(i) For calendar year 2000, such loans shall qualify in a dollar
amount up to 33 percent of: the total dollar amount of AMA acquired by
a Bank after April 12, 2000, less the dollar amount of United States
government-insured or guaranteed whole single-family residential
mortgage loans acquired after April 12, 2000 under commitments entered
into on or before April 12, 2000; and
(ii) For calendar year 2001 and subsequent years, such loans shall
qualify in a dollar amount up to 33 percent of: the total dollar amount
of AMA acquired by a Bank during that year, less the dollar amount of
United States government-insured or guaranteed whole single-family
residential mortgage loans acquired under commitments entered into on
or before April 12, 2000.
(3) Standby letters of credit;
(4) Intermediary derivative contracts;
(5) Non-securitized debt investments or equity investments that:
(i) Primarily benefit low- or moderate-income households, or areas
targeted for redevelopment by local, state, tribal or Federal
government (including Federal empowerment zones and enterprise and
champion communities) by providing or supporting one or more of the
following activities:
(A) Affordable housing;
(B) Economic development;
(C) Community services;
(D) Permanent jobs for members of low- or moderate-income
households; or
(E) Area revitalization or stabilization; and
(ii) Involve one or more members or associates in a manner,
financial or otherwise, and to a degree to be determined by the Bank;
(6) Investments in SBICs, to the extent that a Bank's investment is
structured to be matched by an investment in the same activity by
members or associates of the Bank making the investment;
(7) The short-term tranche of SBIC securities guaranteed by the
Small Business Administration;
(8) Section 108 Interim Notes and Participation Certificates
guaranteed by the Department of Housing and Urban Development under
section 108 of the Housing and Community Development Act of 1974, as
amended (42 U.S.C. 5308);
(9) Investments and obligations issued or guaranteed under Title VI
of the Native American Housing Assistance and Self-Determination Act of
1996 (25 U.S.C. 4191 through 4195).
(b) Status of certain investments made under the FMP.
Notwithstanding that certain investments made by a Bank pursuant to
sections II.B.8. through 11. of the FMP do not qualify as core mission
activities, any limit on such assets that may be promulgated by the
Finance Board shall not limit the authority of a Bank to hold to
maturity, or to fund using the proceeds of consolidated obligations,
such assets held by the Bank as of April 12, 2000, except as may be
necessary to ensure the safety and soundness of the Banks.
PART 950--ADVANCES
7. The authority citation for part 950 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430,
1430b and 1431.
8. Amend part 950 by adding a new subpart C to read as follows:
Subpart C--Advances to Out-of-District Members and Associates
Sec. 950.18 Advances to out-of-district members and associates.
(a) Establishment of creditor/debtor relationship. Any Bank may
become a creditor to a member or associate of another Bank through the
purchase of an outstanding advance, or a participation interest
therein, from the other Bank, or through an arrangement with the other
Bank that provides for the establishment of such a creditor/debtor
relationship at the time an advance is made.
(b) Applicability of advances requirements. Any debtor/creditor
relationship established pursuant to paragraph (a) of this section
shall be subject to all of the provisions of this part that would apply
to an advance made by a Bank to its own members or associates.
9. In subchapter G, add a new part 955 to read as follows:
PART 955--ACQUIRED MEMBER ASSETS
Sec.
955.1 Definitions.
955.2 Authorization to hold acquired member assets.
955.3 Required credit-risk sharing structure.
[[Page 25689]]
955.4 Reporting requirements for acquired member assets.
955.5 Administrative and investment transactions between Banks.
955.6 Risk-based capital requirement for acquired member assets.
Appendix A to Part 955--Reporting requirements for single-family
acquired member assets that are residential mortgages: loan-level
data elements
Appendix B to Part 955--Reporting requirements for multi-family
acquired member assets that are residential mortgages: loan-level
data elements
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1430, 1430b, 1431.
Sec. 955.1 Definitions.
As used in this section:
Affiliate has the meaning set forth in Sec. 950.1 of this chapter.
Financial Management Policy (FMP) has the meaning set forth in
Sec. 956.1 of this chapter.
NRSRO has the meaning set forth in Sec. 966.1 of this chapter.
Residential real property has the meaning set forth in Sec. 950.1
of this chapter.
State has the meaning set forth in Sec. 925.1 of this chapter
Sec. 955.2 Authorization to hold acquired member assets.
Subject to the requirements of part 980 of this chapter, each Bank
may hold assets acquired from or through Bank System members or
associates by means of either a purchase or a funding transaction,
subject to each of the following requirements:
(a) Loan type requirement. The assets are either:
(1) Whole loans that are eligible to secure advances under
Sec. Sec. 950.7(a)(1)(i), (a)(2)(ii), (a)(4), or (b)(1) of this
chapter, excluding:
(i) Single-family mortgages where the loan amount exceeds the
limits established pursuant to 12 U.S.C. 1717(b)(2); and (ii) Loans
made to an entity, or secured by property, not located in a state;
(2) Whole loans secured by manufactured housing, regardless of
whether such housing qualifies as residential real property; or (3)
State and local housing finance agency bonds;
(b) Member or associate nexus requirement. The assets are:
(1) Either:
(i) Originated or issued by, through, or on behalf of a Bank System
member or associate, or an affiliate thereof; or (ii) Held for a valid
business purpose by a Bank System member or associate, or an affiliate
thereof, prior to acquisition by a Bank; and
(2) Are acquired either:
(i) From a member or associate of the acquiring Bank;
(ii) From a member or associate of another Bank, pursuant to an
arrangement with that Bank; or
(iii) From another Bank; and
(c) Credit risk-sharing requirement. The transactions through which
the Bank acquires the assets either:
(1) Meet the credit risk-sharing requirements of Sec. 955.3 of this
part; or
(2) Were authorized by the Finance Board under section II.B.12. of
the FMP and are within any total dollar cap established by the Finance
Board at the time of such authorization.
Sec. 955.3 Required credit risk-sharing structure.
(a) Determination of necessary credit enhancement. (1) At the time
of acquisition of acquired member assets (AMA), a Bank shall determine:
(i) The expected credit losses on each asset or pool of assets; and
(ii) The total credit enhancement necessary to enhance the asset or
pool of assets to at least the fourth highest credit rating category,
or such higher credit rating as the Bank may require.
(2) The Bank's estimates of expected losses and total credit
enhancement required under paragraph (a)(1) of this section shall be
determined using a methodology that is confirmed in writing by an NRSRO
to be comparable to a methodology that the NRSRO would use in
conducting a formal rating review of the asset or pool of assets.
(b) Credit risk-sharing structure. Based on the determinations
required under paragraph (a) of this section, a Bank shall implement a
credit enhancement structure that:
(1) As evidenced by a written confirmation from an NRSRO, enhances
the asset or pool of assets to at least the fourth highest credit
rating category, or such higher credit rating as the Bank may require;
and
(2) Incorporates credit risk-sharing with the member or associate
such that either:
(i) The member or associate from which a Bank acquired an asset or
pool of assets directly bears the economic consequences of all credit
losses in excess of expected losses, as estimated by the Bank using the
methodology described in paragraph (a) of this section, up to the
amount necessary to enhance the asset or pool of assets to the fourth
highest credit rating category, or such higher rating as required by
the Bank; or
(ii)(A) The member or associate from which the Bank acquired an
asset or pool of assets directly bears the economic consequences of all
credit losses up to the amount of expected losses on the asset or pool
of assets, as estimated by the Bank using the methodology described in
paragraph (a) of this section; and
(B) The member or associate assumes responsibility for such
additional credit loss coverage as is necessary to enhance the asset or
pool of assets to the fourth highest credit rating category, or such
higher rating as required by the Bank, which coverage may be provided
by, or allocated among:
(1) The member or associate;
(2) Any other member or associate in the Bank's district;
(3) Loan-level insurance, including United States government
insurance or guarantee, where the member or associate is legally
obligated at all times to maintain such insurance with an insurer rated
not lower than the second highest credit rating category.
Sec. 955.4 Reporting requirements for acquired member assets.
(a) Loan-level data elements. (1) Each Bank that acquires AMA that
are residential mortgages shall collect and maintain loan-level data on
each mortgage held, as specified in appendix A (for single-family
mortgage assets) or appendix B (for multifamily mortgage assets) to
this part.
(2) The Finance Board may, from time-to-time, amend the lists of
required loan-level data elements set forth in appendices A and B of
this part by publication of a document in the Federal Register.
(b) Quarterly mortgage reports. Within 60 days of the end of every
quarter of every calendar year, each Bank that acquires AMA that are
residential mortgages shall submit to the Finance Board a Mortgage
Report, which shall include:
(1) Aggregations of the loan-level mortgage data compiled by the
Bank pursuant to paragraph (a) of this section for year-to-date
mortgage acquisitions, in a format specified by the Finance Board;
(2) Year-to-date dollar volume, number of units and number of
mortgages on owner-occupied and rental properties relating to AMA
acquired by the Bank; and
(3) For the second and fourth quarter Mortgage Reports only, year-
to-date loan-level data that:
(i) Comprises the data elements required to be collected and
maintained by the Bank under paragraph (a) of this section; and
(ii) Appears in a machine-readable format specified by the Finance
Board.
(c) Additional reports. The Finance Board may at any time require a
Bank to submit reports in addition to those required under paragraph
(b) of this section.
[[Page 25690]]
Sec. 955.5 Administrative and investment transactions between Banks.
(a) Delegation of administrative duties. A Bank may delegate the
administration of an AMA program to another Bank whose administrative
office has been examined and approved by the Finance Board to process
AMA transactions. The existence of such a delegation, or the
possibility that such a delegation may be made, must be disclosed to
any potential participating member or associate before any AMA-related
agreements are signed with that member or associate.
(b) Terminability of agreements. Any agreement made between two or
more Banks in connection with any AMA program shall be made terminable
by either party after a reasonable notice period.
(c) Delegation of pricing authority. A Bank that has delegated its
AMA pricing function to another Bank shall retain a right to refuse to
acquire AMA at prices it does not consider appropriate.
Sec. 955.6 Risk-based capital requirement for acquired member assets.
Each Bank shall hold retained earnings plus specific loan loss
reserves as support for the credit risk of all AMA estimated by the
Bank to be below the second highest credit rating in an amount equal to
or greater than: the outstanding balance of the assets or pools of
assets times a factor associated with the credit rating of the assets
or pools of assets as determined by the Finance Board.
Appendix A to Part 955--Reporting Requirements For Single-Family
Acquired Member Assets That Are Residential Mortgages: Loan-Level Data
Elements
1. FHLBank District Flag--Two-digit numeric code designating the
District FHLBank that originally acquired the loan.
2. Participating FHLBank District Flag--Two-digit numeric code
designating the District FHLBank that purchased a participation in
the loan.
3. Loan Number--Unique numeric identifier used by the FHLBanks
for each mortgage acquisition.
4. US Postal State--Two-digit numeric Federal Information
Processing Standard (FIPS) code.
5. US Postal Zip Code--Five-digit zip code for the property.
6. MSA Code--Four-digit numeric code for the property's
metropolitan statistical area (MSA) if the property is located in an
MSA.
7. Place Code--Five-digit numeric FIPS code.
8. County--County, as designated in the most recent decennial
census by the Bureau of the Census.
9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as
used in the most recent decennial census by the Bureau of the
Census.
10. 1990 Census Tract-Percent Minority--Percentage of a census
tract's population that is minority based on the most recent
decennial census by the Bureau of the Census.
11. 1990 Census Tract-Median Income--Median family income for
the census tract.
12. 1990 Local Area Median Income--Median income for the area.
13. Tract Income Ratio--Ratio of the 1990 census tract median
income to the 1990 local area median income (i.e., loan-level data
element number 11 divided by loan-level data element number 12).
14. Borrower(s) Annual Income--Combined income of all borrowers.
15. Area Median Family Income--Current median family income for
a family of four for the area as established by HUD.
16. Borrower Income Ratio--Ratio of Borrower(s) annual income to
area median family income.
17. Acquisition Unpaid Principal Balance (UPB)--UPB in whole
dollars of the mortgage when acquired by the FHLBank.
18. Loan-to-Value (LTV) Ratio at Origination--LTV ratio of the
mortgage at the time of origination.
19. Participation Percentage--Where the mortgage acquisition is
a participation, the percentage of the mortgage for each FHLBank
listed in loan-level data element number 2.
20. Date of Mortgage Note--Date the mortgage note was created.
21. Date of Acquisition--Date the FHLBank acquired the mortgage.
22. Purpose of Loan--Indicates whether the mortgage was a
purchase money mortgage, a refinancing, a construction mortgage, or
a financing of property rehabilitation.
23. Cooperative Unit Mortgage--Indicates whether the mortgage is
on a dwelling unit in a cooperative housing building.
24. Product Type--Indicates the product type of the mortgage,
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated
payment mortgage (GPM) or growing equity mortgages (GEM), reverse
annuity mortgage, or other.
25. Federal Guarantee--Numeric code that indicates whether the
mortgage has a Federal guarantee, and from which agency.
26. Term of Mortgage at Origination--Term of the mortgage at the
time of origination in months.
27. Amortization Term--For amortizing mortgages, the
amortization term of the mortgage in months.
28. Originating Lender Institution--Name of the institution that
originated the loan.
29. Originating Lender City--City location of the institution
that originated the loan.
30. Originating Lender State--State location of the institution
that originated the loan.
31. Acquiring Lender Institution--Name of the institution from
which the FHLBank acquired the mortgage.
32. Acquiring Lender City--City location of the institution from
which the FHLBank acquired the mortgage.
33. Acquiring Lender State--State location of the institution
from which the FHLBank acquired the mortgage.
34. Type of Seller Institution--Type of institution that sold
the mortgage to the GSE, i.e., mortgage company, Savings Association
Insurance Fund (SAIF) insured depositary institution, Bank Insurance
Fund (BIF) insured depositary institution, National Credit Union
Association (NCUA) insured credit union, or other seller.
35. Number of Borrowers--Number of borrowers.
36. First-Time Home Buyer--Numeric code indicating whether the
mortgagor(s) are first-time homebuyers; second mortgages and
refinancings are not treated as first-time homebuyers.
37. Mortgage Purchased under the Banks' Community Investment
Cash Advances (CICA) Programs--Indicates whether the Bank purchased
the mortgage under an AHP or CIP program.
38. Acquisition Type--Indicates whether the FHLBank acquired the
mortgage with cash, by swap, with a credit enhancement, a bond or
debt purchase, reinsurance, risk-sharing, real estate investment
trust (REIT), or a real estate mortgage investment conduit (REMIC),
or other.
39. FHLBank Real Estate Owned--Indicates whether the mortgage is
on a property that was in the FHLBank's real estate owned (REO)
inventory.
40. Borrower Race or National Origin--Numeric code indicating
the race or national origin of the borrower.
41. Co-Borrower Race or National Origin--Numeric code indicating
the race or national origin of the co-borrower.
42. Borrower Gender--Numeric code that indicates whether the
borrower is male or female.
43. Co-Borrower Gender--Numeric code that indicates whether the
co-borrower is male or female.
44. Age of Borrower--Age of borrower in years.
45. Age of Co-Borrower--Age of co-borrower in years.
46. Occupancy Code--Indicates whether the mortgaged property is
an owner-occupied principal residence, a second home, or a rental
investment property.
47. Number of Units--Indicates the number of units in the
mortgaged property.
48. Unit--Number of Bedrooms--Where the property contains non-
owner-occupied dwelling units, the number of bedrooms in each of
those units.
49. Unit--Affordable Category--Where the property contains non-
owner-occupied dwelling units, indicates under which, if any, of the
special affordable goals the units qualified.
50. Unit--Reported Rent Level--Where the property contains non-
owner-occupied dwelling units, the rent level for each unit in whole
dollars.
51. Unit--Reported Rent Plus Utilities--Where the property
contains non-owner-occupied dwelling units, the rent level plus the
utility cost for each unit in whole dollars.
52. Geographically Targeted Indicator--Numeric code that
indicates loans made in census tracts classified as underserved by
HUD.
53. Interest Rate--Note rate on the loan.
54. Loan Amount--Loan balance at origination.
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55. Front-end Ratio--Ratio of principal, interest, taxes, and
insurance to borrower(s) income.
56. Back-end Ratio--Ratio of all debt payments to borrower(s)
income.
57. Borrower FICO Score--Fair, Isaacs, Co. credit score of
borrower.
58. Co-Borrower FICO Score--Fair, Isaacs, Co. credit score of
co-borrower.
59. PMI Percent--Percent of original loan balance covered by
private mortgage insurance.
60. Credit Enhancement--Numeric code indicating type of credit
enhancement.
61. Self-Employed Indicator--Numeric indicator for whether the
borrower is self-employed.
62. Property Type--Numeric indicator for whether the property is
single-family detached, condominium, townhouse, PUD, etc.
63. Default Status--Numeric indicator for whether the loan is
currently in default.
64. Termination Date--Date on which the loan terminated.
65. Termination Type--Numeric indicator for whether the loan
terminated in a prepayment, foreclosure, or other types of
termination.
66. ARM Index--Index used for the calculation of interest on an
ARM.
67. ARM margin--Margin added to the index for calculation of the
interest on an ARM.
68. Prepayment Penalty Terms--Numeric indicator for types of
prepayment penalties.
Appendix B to Part 955--Reporting Requirements for Multi-Family
Acquired Member Assets That Are Residential Mortgages: Loan-Level Data
Elements
1. FHLBank District Flag--Two-digit numeric code designating the
District FHLBank that originally acquired the loan.
2. Participating FHLBank District Flag--Two-digit numeric code
designating the District FHLBank that purchased a participation in
the loan.
3. Loan Number--Unique numeric identifier used by the FHLBanks
for each mortgage acquisition.
4. US Postal State--Two-digit numeric Federal Information
Processing Standard (FIPS) code.
5. US Postal Zip Code--Five-digit zip code for the property.
6. MSA Code--Four-digit numeric code for the property's
metropolitan statistical area (MSA) if the property is located in an
MSA.
7. Place Code--Five-digit numeric FIPS code.
8. County--County, as designated in the most recent decennial
census by the Bureau of the Census.
9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as
used in the most recent decennial census by the Bureau of the
Census.
10. 1990 Census Tract-Percent Minority--Percentage of a census
tract's population that is minority based on the most recent
decennial census by the Bureau of the Census.
11. 1990 Census Tract-Median Income--Median family income for
the census tract.
12. 1990 Local Area Median Income--Median income for the area.
13. Tract Income Ratio--Ratio of the 1990 census tract median
income to the 1990 local area median income (i.e., loan-level data
element number 11 divided by loan-level data element number 12).
14. Area Median Family Income--Current median family income for
a family of four for the area as established by HUD.
15. Affordability Category--Indicates under which, if any, of
the special affordable goals mandated by HUD for Fannie Mae and
Freddie Mac, the property would qualify.
16. Acquisition Unpaid Principal Balance (UPB)--UPB in whole
dollars of the mortgage when purchased by the FHLBank.
17. Loan-to-Value (LTV) Ratio at Origination--LTV ratio of the
mortgage at the time of origination.
18. Participation Percentage--Where the mortgage acquisition is
a participation, the percentage of the mortgage when the note was
created for each FHLBank listed in loan-level data element number 2.
19. Date of Mortgage Note--Date the mortgage note was created.
20. Date of Acquisition--Date the FHLBank acquired the mortgage.
21. Purpose of Loan--Indicates whether the mortgage was a
purchase money mortgage, a refinancing, a construction mortgage, or
a financing of property rehabilitation.
22. Cooperative Project Loan--Indicates whether the mortgage is
a project loan on a cooperative housing building.
23. Mortgagor Type--Indicates the type of mortgagor, i.e., an
individual, a for-profit entity such as a corporation or
partnership, a nonprofit entity such as a corporation or
partnership, a public entity, or other type of entity.
24. Product Type--Indicates the product type of the mortgage,
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated
payment mortgage (GPM) or growing equity mortgages (GEM), reverse
annuity mortgage, or other.
25. Government Insurance--Indicates whether any part of the
mortgage has government insurance.
26. FHA Risk Share Percent--The percentage of the risk assumed
for the mortgage purchased under a risk-sharing arrangement with
FHA.
27. Mortgage Purchased under the Banks' Community Investment
Cash Advances (CICA) Programs--Indicates whether the Bank purchased
the mortgage under an AHP or CIP program.
28. Acquisition Type--Indicates whether the FHLBank acquired the
mortgage with cash, by swap, with a credit enhancement, a bond or
debt purchase, reinsurance, risk-sharing, real estate investment
trust (REIT), or a real estate mortgage investment conduit (REMIC),
or other.
29. Term of Mortgage at Origination--Term of the mortgage at the
time of origination in months.
30. Amortization Term--For amortizing mortgages, the
amortization term of the mortgage in months.
31. Originating Lender Institution--Name of the entity that
originated the loan.
32. Originating Lender City--City location of the entity that
originated the loan.
33. Originating Lender State--State location of the entity that
originated the loan.
34. Acquiring Lender Institution--Name of the entity from which
the FHLBank acquired the mortgage.
35. Acquiring Lender City--City location of the entity from
which the FHLBank acquired the mortgage.
36. Acquiring Lender State--State location of the institution
from which the FHLBank acquired the mortgage.
37. Type of Seller Institution--Type of institution that sold
the mortgage to the GSE, i.e., mortgage company, Savings Association
Insurance Fund (SAIF) insured depositary institution, Bank Insurance
Fund (BIF) insured depositary institution, National Credit Union
Association (NCUA) insured credit union, or other seller.
38. FHLBank Real Estate Owned--Indicates whether the mortgage is
on a property that was in the FHLBank's real estate owned (REO)
inventory.
39. Number of Units--Indicates the number of units in the
mortgaged property.
40. Geographically Targeted Indicator--Numeric code that
indicates loans made in census tracts classified as underserved by
HUD.
41. Public Subsidy Program--Indicates whether the mortgage
property is involved in a public subsidy program and which level(s)
of government are involved in the subsidy program, i.e., Federal
government only, other only, Federal government, etc.
42. Unit Class Level--The following data apply to unit types in
a particular mortgaged property. The unit types are defined by the
Banks for each property and are differentiated based on the number
of bedrooms in the units and on the average contract rent for the
units. A unit type must be included for each bedroom size category
in the property;
A. Unit Type XX--Number of Bedroom(s)--the number of bedrooms in
the unit type;
B. Unit Type XX--Number of Units--the number of units in the
property within the unit type;
C. Unite Type XX--Average Reported Rent Level--the average rent
level for the unit type in whole dollars; and
D. Unit Type XX--Average Reported Rent Plus Utilities--the
average reported rent level plus the utility cost for each unit in
whole dollars; and
E. Unit Type XX--Affordability Level--the ratio of the average
reported rent plus utilities for the unit type to the adjusted area
median income
F. Unit Type XX--Tenant Income Indicator--indicates whether the
tenant's income is less than 60 percent of area median income,
greater than or equal to 60 percent but less than 80 percent of area
median income, greater than or equal to 80 percent but less than 100
percent of area median income, or greater than or equal to 100
percent of area median income.
43. Interest Rate--Note rate on the loan.
44. Debt Service Coverage Ratio--Ratio of net operating income
to debt service.
45. Default Status--Numeric indicator for whether the loan is
currently in default.
46. Termination Date--Date on which the loan terminated.
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47. Termination Type--Numeric indicator for whether the loan
terminated in a prepayment, foreclosure, or other types of
termination.
48. ARM Index--Index used for the calculation of interest on an
ARM.
49. ARM margin--Margin added to the index for calculation of the
interest on an ARM.
50. Prepayment Penalty Terms--Numeric indicator for types of
prepayment penalties.
10. In subchapter G, revise part 956 to read as follows:
PART 956--FEDERAL HOME LOAN BANK INVESTMENTS
Sec.
956.1 Definitions.
956.2 Authorized investments.
956.3 Prohibited investments and prudential rules.
956.4 Risk-based capital requirement for investments.
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1431, 1436.
Sec. 956.1 Definitions.
As used in this part:
Deposits in banks or trust companies has the meaning set forth in
Sec. 969.3 of this chapter.
Financial Management Policy means the Financial Management Policy
For The Federal Home Loan Bank System approved by the Finance Board
pursuant to Finance Board Resolution No. 96-45 (July 3, 1996), as
amended by Finance Board Resolution No. 96-90 (Dec, 6, 1996), Finance
Board Resolution No. 97-05 (Jan. 14, 1997), and Finance Board
Resolution No. 97-86 (Dec. 17, 1997).
GAAP means Generally Accepted Accounting Principles.
Investment grade means:
(1) A credit quality rating in one of the four highest credit
rating categories by an NRSRO and not below the fourth highest credit
rating category by any NRSRO; or
(2) If there is no credit quality rating by an NRSRO, a
determination by a Bank that the issuer, asset or instrument is the
credit equivalent of investment grade using credit rating standards
available from an NRSRO or other similar standards.
NRSRO has the meaning set forth in Sec. 966.1 of this chapter.
Sec. 956.2 Authorized investments.
In addition to assets enumerated in parts 950 and 955 of this
chapter and subject to the applicable limitations set forth in this
part and in part 980 of this chapter, each Bank may invest in:
(a) Obligations of the United States;
(b) Deposits in banks or trust companies;
(c) Obligations, participations or other instruments of, or issued
by, the Federal National Mortgage Association or the Government
National Mortgage Association;
(d) Mortgages, obligations, or other securities that are, or ever
have been, sold by the Federal Home Loan Mortgage Corporation pursuant
to 12 U.S.C. 1454 or 1455;
(e) Stock, obligations, or other securities of any small business
investment company formed pursuant to 15 U.S.C. 681(d), to the extent
such investment is made for purposes of aiding members of the Bank; and
(f) Instruments that the Bank has determined are permissible
investments for fiduciary or trust funds under the laws of the state in
which the Bank is located.
Sec. 956.3 Prohibited investments and prudential rules.
(a) Prohibited investments. A Bank may not invest in:
(1) Instruments that provide an ownership interest in an entity,
except for investments described in Secs. 940.3(a)(5) and (6) of this
chapter;
(2) Instruments issued by non-United States entities, except United
States branches and agency offices of foreign commercial banks;
(3) Debt instruments that are not rated as investment grade,
except:
(i) Investments described in Sec. 940.3(a)(5) of this chapter; and
(ii) Debt instruments that were downgraded to a below investment
grade rating after acquisition by the Bank; or
(4) Whole mortgages or other whole loans, or interests in mortgages
or loans, except:
(i) Acquired member assets;
(ii) Marketable direct obligations of state or local government
units or agencies, having at least the second highest credit rating
from a NRSRO, where the purchase of such obligations by the Bank
provides to the issuer the customized terms, necessary liquidity, or
favorable pricing required to generate needed funding for housing or
community lending;
(iii) Mortgage-backed securities, or asset-backed securities
collateralized by manufactured housing loans or home equity loans, that
meet the definition of the term ``securities'' under 15 U.S.C.
77b(a)(1); and
(iv) Loans held or acquired pursuant to section 12(b) of the Act
(12 U.S.C. 1432(b)).
(b) Foreign currency or commodity positions prohibited. A Bank may
not take a position in any commodity or foreign currency. If a Bank
participates in consolidated obligations denominated in a currency
other than U.S. Dollars or linked to equity or commodity prices, the
currency, commodity and equity risks must be hedged.
Sec. 956.4 Risk-based capital requirement for investments.
Each Bank shall hold retained earnings plus specific loan loss
reserves as support for the credit risk of all investments that are not
rated by a NRSRO, or are rated below the second highest credit rating,
in an amount equal to or greater than the outstanding balance of the
investments times a factor associated with the credit rating of the
investments as determined by the Finance Board.
Dated: April 12, 2000.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-10909 Filed 5-2-00; 8:45 am]
BILLING CODE 6725-01-P